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Wages, taxes and fairness

We have a system that increasingly taxes work and subsidizes non-work.

Milton Friedman

Weeks of unrest and strife at Lonmin finally settled when it was announced that a wage agreement has been reached that will result in an increase of between 11% and 22% to workers. However many analysts have warned that the agreement sets a dangerous precedent. It is argued that workers in related industries will now also demand similar increases and may resort to violence if their demands are not met.

Cyril Ramaphosa is of the same view as Cosatu's general secretary Vavi that the Lonmin wage deal has set a bad precedent that could undermine collective bargaining in the mining industry in future.

The agreement will result in a significant increase in the wage bill of mines. This will have a direct effect on tax collection. A reduction of profits in the mining and related industries will force government to increase tax collection from other sources.

Economists and other commentators are unanimous in their assessment of the Marikana effect.

City Press reported an assessment by President Zuma that the events had cost the Treasury R3.1 billion and the mining industry R4.5 billion rand in lost output. According to the Financial Times the mining sector employs 500 000 people and contributes 5 - 8 % of GDP and it is expected that economic growth will decline from 2.5% to 1.5%.

Fairness

The Commission of Inquiry appointed by the President is preparing its report and with baited breath we are all awaiting the outcome of this report. Political influence and power, competing unions, migrant workers, and mining practices have all received the blame for the events.

The basic argument has been that wages of miners and most workers in South Africa are not fair. Mines and the business sector in general should share more of their profits with workers.

The question then is what constitutes a fair wage.

Fairness is also a concept that is very popular with the Treasury. Taxpayers are frequently reminded that they should pay their fair share of taxes.

If workers can demand a fair wage, then should taxpayers also demand a fair tax? One that will leave them with more money to spend according to their own preferences?

Fairness was also at the heart of Malema's argument when he argued that Lonmin had a high political connection and questioned how Cyril Ramaphosa could afford a R20 million buffalo but could not, as a Lonmin Board member, pay the R12,500 wages demanded by the striking workers.

Ramaphosa's response was telling. According to SAFm he apologized for bidding millions at an auction for a buffalo bull amid a "sea of poverty". But why should he apologize?

Should mines, manufacturers, retailers, services and other business sectors apologize for making profits and paying taxes? Should the 1.9 million individuals that pay 96% of all income tax apologize for their ability to earn income levels that attract taxes? Taxes paid by businesses and individuals are used for infrastructure and social subsidies.

Where does Ramaphosa think the revenue generated from the bull auction will go? A large portion will be paid in taxes. The balance will be used by the seller to invest in his farm, employ more workers and to pay for consumer goods. This consumption will attract VAT and create employment in farming related industries.

Was the auction process unfair? Or was the transaction concluded between two willing parties? Was the seller unfair in demanding a price of nearly R20 million? How many people would have been unemployed if the seller did not get his R20 million?

A novel approach to achieving higher wages would be to lower taxes paid by business. If businesses pay less tax, it will allow them to pay higher wages.

Comments...

Margaret Herbst (Haylett)
says...Posted 02 October 2012

Dear mr Klue, I want you to know that I really enjoy everything you write, can't wait for the nextTax
Time. You have enormous insight into the economic and tax problems and certainly have a
excellent talent for writing. I am a member of Saipa at present but have decided to join SAIT as well.
Regards Margaret Herbst

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